Companies giving away Bonus Shares

Whenever we get something free, we feel happy : be it any gift or a share. In that line, many companies are giving away bonus share in predefined ratio. Before jumping on to buying these shares, we need to understand why do these companies give bonus inthe first place. Following are few of them:
1) Companies with distributable profit usually declared dividend. In this case, the dividend cash flows out of the company. But by issuing bonus share, the company retains the cash and issues bonus shares. It is like automatic subscription to the companies shares.
2) By issuing bonus shares, the equity base of the company multiplies automatically.

Over a period of time, bonus concept works exponentially. For instance, if a company issues bonus shares once in 3 years in the ratio of 1:1, and if the investor received 10 such bonus issues, then 100 shares invested initally would have 'grown' in number to 1,02,400 shares. Assuming the share price to be same Rs.10 in begining and end of such explosion, then Rs.1000 invested initally would be equal to 10,24,000. To understand it better, do read our analysis of bonus history of CIPLA in this website.

A word of caution: Not all companies issue bonus shares for genuine reasons. Some of them declare bonus for dubios reasons. They may create hype only to crash later. It is our duty to identity good companies (highlighted below) which issue bonus shares. Do study these stocks throughly before buying them.